Chapter 11

Which of the following best illustrates the use of "discretionary" fiscal policy?

Congress passes a bill authorizing $2 billion in additional spending when it receives news of a deepening recession.

All of the following are variables that can be manipulated to affect fiscal policy **except one.** Which is the exception?

the interest rate

"Net taxes" equals "taxes minus transfer payments"

True

Assume that initially G is $100 and equilibrium real GDP demanded is $1,000. If the multiplier is 4 and G increases to $200, real GDP demanded will increase

to $1400

Given the information in Exhibit 12-1, the government spending multiplier is equal to

5

Of the following fiscal programs, which has the smallest effect, per dollar, on aggregate demand?

Social Security

The economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS50 in Exhibit 12-3 is facing an expansionary gap.

False

Which of the following sets of policies would unquestionably move the economy illustrated in Exhibit 12-4 to full employment?

increase in government purchases, decrease in taxes, and increase in transfer payments

When net taxes increase and government purchases decrease,

the aggregate demand curve shifts leftward

All of the following might be effective in eliminating a contractionary gap except one.. What is the exception?

reducing Social Security payments to beneficiaries

To close an expansionary gap, the government can

decrease government spending, which will decrease aggregate demand

Which of the following is an appropriate fiscal policy to address the inflation that occurs when the economy is above potential GDP?

Increase taxes to reduce aggregate demand

If the economy is already producing at its potential,

the spending multiplier =0 in the long run

Who argued that the economy should be left to itself to close contractionary gap?

the classical economists

According to classical economist, government intervention is

not necessary to maintain full employment

Keynes believed that the economy does not automatically move toward an equilibrium at full employment

True

During World War 2,

aggregate demand, income, and employment increased in the US

John Maynard Keynes believed that

wages and prices were relatively inflexible and interest rates would not fall fast enough to restore full employment

Most government transfer programs are

automatic stabilizers

Which of the following is true of automatic stabilizers?

They include the unemployment program

During a recession, unemployment insurance ensures that

disposable income does not fall by as much as GDP decreases

During the 1970s, demand-management policy

was found to be highly unsuitable in periods of stagflation such as the decade of the 1970s

If policy makers think the natural rate of unemployment is higher than it really is, then their policies designed to move the economy to the estimated natural rate, if continued over the long run, will

keep the economy below its potential GDP level

People will be likely to spend a higher percentage of any additional income when

they believe that the increase is permanent

Other things constant, a decrease in real GDP demanded is caused by a(n)